2021 was a banner year for mergers and acquisitions. The combination of abundant capital, low-interest rates, and rebounding growth made for the strongest M&A year since 2015, with global mergers and acquisitions totaling $5.1 trillion, up 34% from $3.8 trillion in 2020. And all indications are that 2022 will be even bigger. In a recent Deloitte survey, 92% of respondents from across several industries expected total M&A volume to rise in 2022.
Getting less attention—but no less of a major business trend right now—are divestments. As companies look to gain efficiencies, comply with antitrust regulations, or improve performance, they are looking to spin off divisions into separate companies. In the Deloitte survey cited above, one in three corporate respondents said they were considering divestment, and the news is filled with notable examples.
On December 10, Daimler officially broke into two companies—one controlling its car and van business, the other its bus and truck business. Johnson & Johnson has announced plans to split its consumer products business from its pharmaceutical and medical device operations. In retail, Seattle-based fashion retailer Nordstrom is looking to spin off its discount division Nordstrom Rack, while Macy's online operations were recently valued at $14 billion by outside evaluators in advance of a possible divestment. Both are following the path of rival chain Saks Fifth Avenue, which recently spun off its e-commerce business.
If your company is considering a merger, acquisition, or divestment this year, ask yourself: What's the plan for contract review and assignment? If your company is acquisitive, how will you vet all the contracts your organization will now be liable for? How will you determine which of those agreements you might consider leaving behind? Or if your company is involved in a divestment, how will you determine which contracts go to which entity? And how will you do all this work without racking up an enormous outside legal bill and exposing your company to risk?
The Contract Questions That Arise in Divestments, Mergers, and Acquisitions
Analyzing those contracts can be challenging, especially if managed manually. First, surfacing all impacted agreements in filing cabinets, SharePoint sites, and desktops can be extremely laborious, and the act of digesting and reviewing those contracts–which entails separating contractual responsibilities and assigning them to the correct entity pursuant to the change-of-control and assignment clauses–is an arduous, risk-filled process, sometimes involving thousands of contracts.
Countless questions must be considered: What contracts stay with Old Entity A? What contracts move to New Entity B? Which can be assigned and transferred by operation of law? Which contracts have an express prohibition against assignment without written consent?
Target companies need to respond to a huge volume of due diligence queries on material contracts involving customers, vendors, suppliers, key employees, intellectual property and more. Even a simple question around contract expiry dates or identifying the most recent version of an executed contract can unnecessarily delay the transaction and affect the purchase price between the parties.
Finally, once a transaction is signed and closed, an acquiror must integrate the acquired company's contracts (along with executed assignment agreements, where applicable) into their own system. For companies who have been through the process, ‘seamless' is not a word they typically use to describe it.
The Role of AI-Powered CLM
As more change-of-control transactions occur, AI combined with contract management software can be used to replicate what the attorneys in one major spinoff accomplished.
In 2012, a large food conglomerate divested its $18 billion North American grocery business. The divestment ultimately affected 20,000 patents, 40,000 contract documents, and 80,000 trademarks. The grocery business had to secure the duplication or consent to the assignment of more than 6,000 agreements to proceed with the spinoff—an effort that ultimately involved more than 200 legal professionals and a homegrown contract repository to manage the workload.
A decade later, AI technology has progressed so that much of this manual (contracted) labor can be handled by algorithms trained on contracts to extract key metadata, clauses, and financial data. Furthermore, the rise of enterprise-grade contract lifecycle management software means more and more companies have all their contracts in a centralized, digital repository, for an even more comprehensive review.
As we move into 2022, we can expect to see lots more action on the M&A and divestment front. Companies need to find the right M&A opportunities to stay out in front of market needs.
The pain and labor associated with contract assignment in connection with M&A and other change-of-control transactions like divestment can be greatly mitigated. With the right technology, companies can leverage their contracts for advantage and agility amid commercial turbulence–be it for M&A, divestments, or other strategic pivots. Without the right technology, well … expect to increase your budget for human lawyer review.